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BP to pay $18.7bn to US government and five states to settle Gulf of Mexico oil spill claims

03 July 2015

As part of the damages, a record $5.5bn will cover federal penalties under the Clean Water Act, topping the previous high of $1bn. Louisiana, Mississippi, Alabama, Florida and Texas will all receive payouts when the deal is approved by a federal judge. "This is a realistic outcome which provides clarity and certainty for all parties," BP chief executive Bob Dudley said on July 7.

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The US states sued BP for damages not covered by the company’s earlier settlements with businesses and individuals harmed by the 2010 explosion of BP's Deepwater Horizon rig in the Gulf of Mexico. They sued BP under the Oil Pollution Act, which holds polluters liable for municipal losses caused by oil spills.

The statute requires corporations to compensate state and local governments for shortfalls in tax revenues and increased costs for services after a spill.

Dudley said: "This agreement will resolve the largest liabilities remaining from the tragic accident and enable BP to focus on safely delivering the energy the world needs. For the United States and the Gulf in particular, this agreement will deliver a significant income stream over many years for further restoration of natural resources and for losses related to the spill.

"When concluded, this will resolve not only the Clean Water Act proceedings but also the Natural Resource Damage claims as well as other claims brought by Gulf States and local government entities."

BP’s agreement, described by the White House as “historic”, spreads the $18.7bn payment to the US government, five Gulf of Mexico states and 400 local government authorities over 18 years.

The settlement was reached after three months of negotiations with senior US government officials, and adds another $10 billion to BP’s total bill for the accident, taking it to $54 billion. The five affected states were claiming a collective $35 billion in compensation, while BP faced another $13.7 billion fine if it was found guilty of gross negligence under the Clean Water Act.

BP warned in court papers this year that a Clean Water Act penalty “above the low end” could bankrupt its Gulf of Mexico subsidiary, BPXP. It has spent five years trying to recover from the explosion and spill at its Macondo well, which killed 11 workers and led to 3.2 million barrels of oil spilling into the Gulf of Mexico.

Brian Gilvary, the BP chief financial officer who led the negotiations, said that spreading the payments meant the settlement would not affect BP’s short or medium-term spending plans. “We’re still one of the biggest investors, if not the biggest investor, in the US,” he said. “Removing this overhang means we can move foward.”

Although the settlement does not include private claims from parties who say they suffered damages as a result of the 2010 spill, Dr Gilvary suggested that these liabilities were not likely to be substantial. Any individual with a case against the group was likely to have already made a claim under BP’s separate compensation claims, he said.

In May, BP reached a settlement with Halliburton and Transocean, its American partners on the Deepwater Horizon rig. BP had taken legal action against Halliburton, the oil services company that cemented the well, and Transocean, which owned the rig. Both companies countersued BP, which was the operator of the well.

Loretta Lynch, attorney-general of the United States, said: “If approved by the court, this settlement would be the largest settlement with a single entity in American history.”

Research analysts said the news was positive both for BP and for the US Government as the latter could claim it was the biggest settlement of all time, while the oil major has managed to spread the payments over a long period and make some of the liability (the natural resource damages and state claims) tax-deductible. The criminal fines and Clean Water Act charges are not.

BP shares rose 4% on the news, valuing it at about £80 billion. The City reacted with relief that the oil major was finally drawing a line under its potential liabilities.